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Do exchange-contracted market makers improve market quality for liquid stocks?
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper studies the market impacts of contracted liquidity providers by investigating the event in which NASDAQ OMX Stockholm (NOMX) introduced a liquidity provider scheme for OMXS30 constituent stocks, which are the most actively traded stocks on NOMX, in 2012. The liquidity provider scheme reduces transaction fees for registered market members if they fulfill the liquidity supplying requirement specified by the scheme. The results suggest that, on NOMX, OMXS30 stocks became more liquid after the scheme’s introduction. The liquidity improvement on NOMX was not accompanied by a lower liquidity level on Chi-X, the major alternative trading venue for OMXS30 stocks. The results do not support the view that liquidity migrated to NOMX from the alternative market after the introduction of the liquidity provider scheme. The order processing cost decreased after the scheme’s introduction, implying that qualified market makers have benefited from a cost reduction from the scheme and charge less compensation for supplying liquidity than before. Liquidity consumers’ costs have reduced accordingly. This result implies a welfare transfer from the exchange to investors. The adverse selection cost on NOMX also fell after the introduction of the liquidity provider scheme. 

National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-119572OAI: oai:DiVA.org:su-119572DiVA: diva2:846678
Available from: 2015-08-17 Created: 2015-08-17 Last updated: 2015-08-18
In thesis
1. Essays on Market Design and Market Quality
Open this publication in new window or tab >>Essays on Market Design and Market Quality
2015 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This dissertation contains four studies on different market structures and their impact on market quality.

Article I studies the effect of introducing stock index futures contracts on the underlying stocks. The results indicate a lower liquidity level in the underlying stocks. However, after introducing market makers to the futures market, liquidity improves in the underlying stocks while trading activity and volatility remain unchanged.

Article II investigates price discovery in the gold futures markets in China and the US. The gold supply and demand from China have been among the world’s largest in recent years. The results show that the gold futures markets in China and the US are cointegrated. Despite its short history, the Chinese gold futures market contributes more to the price discovery than the US market.

Article III examines the order aggressiveness of high-frequency traders (HFTs) and non-HFTs. We find that market-making HFTs follow their own group's previous order more than they follow other traders’ orders. Opportunistic HFTs and non-HFTs tend to split market orders into small portions and submit them in sequences. HFTs adhere strongly to the trade-off between waiting cost and the cost of immediate execution. Non-HFTs care less about this trade-off, but react somewhat stronger to volatility than HFTs.

Article IV studies the impact of introducing contracted liquidity providers to the liquid stocks in Sweden. The results show that liquidity improves after the liquidity providers’ introduction. The liquidity improvement is not accompanied by a lower liquidity level on Chi-X, a major competitor to the Swedish market. Both the order processing cost and adverse selection cost reduce on the Swedish stock market after contracting the liquidity providers.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University, 2015. 14 p.
Keyword
index futures market, underlying stock market, liquidity, volatility, gold futures market, price discovery, high frequency traders, aggressiveness, order submission, liquidity provider, adverse selection cost
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-119577 (URN)978-91-7649-250-5 (ISBN)
Public defence
2015-10-07, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 4: Manuscript.

Available from: 2015-09-15 Created: 2015-08-17 Last updated: 2015-09-16Bibliographically approved

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CiteExportLink to record
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Citation style
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